Welcome to the agilon health Second Quarter 2023 Earnings Conference. My name is Terri, and I will be your operator for today's call. I would now like to turn the call over to Matthew Gillmor, Vice President of Investor Relations, to begin. Please proceed.

Thank you operator. Good afternoon and welcome to the call. With me is our CEO, Steve Sell; and our CFO, Tim Bensley. Before we begin, I'd like to remind you that our remarks and responses to questions may include forward-looking statements. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with our business. These risks and uncertainties are discussed in our SEC filings. Please note that we assume no obligation to update any forward-looking statements. Additionally, certain financial measures we will discuss on this call are non-GAAP. We believe that providing these measures helps investors gain a better and more complete understanding of our financial results and is consistent with how management views our financial results. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is available in the earnings press release and Form 8-K filed with the SEC. Following prepared remarks from Steve and Tim, we will conduct a Q&A session. During the Q&A session, we would ask everyone to please limit themselves to one question so we can get through the full queue in a timely fashion. With that, I'll turn the call over to Steve.

Thanks Matt. Good evening everyone and thank you for joining us. We've had a very successful first half of 2023 and we continue to make rapid progress against our vision to transform health care in 100-plus communities by empowering primary care doctors. Our progress is made possible because of the trust our growing network of partners have placed on agilon. I want to thank our 2,700-plus physician partners and I want to thank my colleagues for their hard work and dedication to supporting our partners and their patients. I'll start with a few highlights from the quarter and year-to-date performance. Our overall momentum remains strong. Performance across our key financial metrics was in line or above our guidance ranges and further demonstrates the unique power of our model to inflect profitability, while driving significant growth in membership and revenue. During the quarter, our MA membership grew 57% to 409,000 members and revenues grew 71% to $1.15 billion. This was above our guidance and was once again supported by the successful onboarding of new PCPs and faster pull-through of members in new markets. Even with our impressive membership growth our profitability continues to inflect with adjusted EBITDA up six-fold on a year-to-date basis and coming in above the high end of our outlook for the quarter. This quarter's EBITDA performance was driven by the strength of our Medicare business across Medicare Advantage and ACO REACH. For MA, medical margins increased 69% to $138 million, while ACO REACH was even stronger with medical margins increasing 82% to $39 million. It should be noted that our medical margin for MA included a net $7 million headwind from prior year claims and revenue with about half of this flowing to adjusted EBITDA, making our profitability gains even more outsized on an underlying basis. The quarter and year-to-date results also reflect our growing confidence with the ACO REACH program in terms of the predictability of agilon's relative and absolute performance. Now, in its third year, the program has reached a frequency and consistency of the data provided to better calculate and understand performance. This level of transparency is new as of 2023 and has confirmed that agilon has differentially managed utilization. Our cost performance in REACH is more than 300 basis points better year-to-date versus the national benchmark which all participants are measured against. Now, looking forward, from a guidance perspective, we have raised our membership, revenue, and adjusted EBITDA outlook for 2023. Importantly, the magnitude of the outperformance within REACH and underlying margin progressing across our partner MA markets has allowed us to both absorb the negative prior year adjustment from 2022 and strengthen our MA reserving approach in 2023. This will set a strong foundation for our performance in 2024 and is intentionally reflected in our updated medical margin outlook for MA. One theme I would like to drive home given all of the speculation on utilization trends is that different models will yield different outcomes. agilon's model is distinctively different and more durable and predictable in driving cost and quality results compared to the broad fee-for-service system which predominates across healthcare today. Let me highlight how we are producing such strong and predictable results and what drives our forward confidence in the business. First, at agilon, we only take risk on patients that have an aligned long-term relationship with a PCP, who has both the resources to positively impact total cost and quality of care. We do not take risk on a broad set of patients in an unmanaged fee-for-service system. Our high-touch PCP-led model allows partner physicians to actively manage the health of a discrete set of senior patients they have often known for decades. While our platform provides doctors with a consistent set of clinical resources, like care managers, social workers and pharmacists supported by technology and data insights. This allows our network to deliver consistent results across 500,000 attributed senior patients while our physician partners focus on the most complex 20% of patients that are driving 70% to 80% of total costs. We believe this high-touch approach has prevented a pent-up demand for care and insulated agilon from any associated spikes in utilization. Second point on differentiation. For our members, our year-to-date composite utilization trend is in line or better than our expectations. Year-to-date, we have driven very moderate ER and inpatient trends with utilization flat to down in the mid-single-digit range while primary care and outpatient utilization is up in the mid to high-single-digit range. Given that, we manage the full premium dollar in a total care relationship, we focus on the composite utilization trend and are comfortable and actively encouraging this mix shift. All of the clinical programs we shared with you at our Investor Day, are oriented towards moving care closer to primary care while significantly reducing unnecessary ER and hospital utilization and they are tracking ahead of our expectations year-to-date. Third, our model has natural advantages, in terms of leading indicators and visibility. From an operational standpoint, we are not just receivers of macro utilization trends. Our teams are actively managing utilization on the ground every day. This includes transition of care nurses, post-discharge follow-up visits and high-risk case managers. Additionally, while MA claims data has some lag, our REACH claims data is very current through May which is more than 90% complete. We have not seen any meaningful change in our expected cost trend including outpatient procedures. Lastly, our 50-50 surplus sharing not only creates strong alignment in driving long-term positive patient outcomes but it also buffers our financial results up and down. As a result, we are able to guide to relatively tight ranges on medical margin and adjusted EBITDA and absorb puts and takes that may arise during a given period. Ultimately, the durability and predictability of our model has enabled agilon to raise our adjusted EBITDA outlook during 2023 and set a strong foundation for 2024, even as some health plans with broad fee-for-service networks are seeing pockets of higher costs. Our success in 2023 sets the table for strong performance in 2024, which should be another year of meaningful step-up in profitability. As we have discussed previously, we operate in a very forward-looking model. And our visibility on the key levers for driving next year's performance is quite high. As an example, the class of 2024 implementation of six new partners and 100,000-plus MA patients is going extremely well and we will have another year of record membership growth with at least 145,000 new MA patients and 25,000 new REACH patients. This class will benefit from multiple advantages as they come on our platform, including a 12-month implementation period, our newly acquired Minerva platform that shortens the period for integrating multiple EMRs, and the local value-based care infrastructure we have already built in multiple existing markets and states that several of these partners will leverage immediately. As a result, this class should have a higher starting point for medical margins in both Medicare Advantage and REACH and contribute to our adjusted EBITDA when we go live in January. Looking further ahead, we are making strong progress with the class of 2025 pipeline with several partners already signed and beginning implementation and others progressing well. This class promises to be another strong mix of diverse physician organization types across both new and existing markets. Our confidence in 2024 is also bolstered by the combined strength of our run rate medical margin performance across MA and REACH in 2023. This is inclusive of the adjustment to our MA reserving approach, which was a proactive decision on our part and supported by the magnitude of the upside, we are seeing in REACH. On a combined basis our underlying margins for MA and REACH are tracking slightly better than our expectations. This is, obviously, important as you think about the stepping off point for 2024. Finally, we are increasingly confident in our ability to manage the new risk adjustment model starting next year. This is a function of our implementation work over the past few months and recent conversations with our health plan partners. We now expect most health plans in our markets will be disciplined and moderate their supplemental benefit offerings in 2024, which ultimately impacts our cost profile. This is not something we had previously factored into our calculus on our ability to successfully manage the new risk model changes and this new information further underscores our confidence in 2024 and beyond.

Thanks, Steve, and good evening, everyone. I'll now review highlights from our second quarter results and our updated outlook for 2023. Starting with our membership for the second quarter. Total members live on the agilon platform increased to approximately 496,000 including both Medicare Advantage and ACO REACH. Our consolidated Medicare Advantage membership increased 57% to 409,000, driven by the addition of new partner geographies and 9% growth with our same geographies. Our same geography growth within our partner markets was 12%. Revenues increased 71% on a year-over-year basis to $1.15 billion during the second quarter. Year-to-date revenues increased 73% to $2.29 billion. Revenue growth was primarily driven by membership gains in new and existing geographies. On a per member per month basis or PMPM, revenue increased 11% during the second quarter. This was primarily driven by benchmark updates and membership mix including higher benchmarks in several new markets. Our Medicare Advantage medical margin increased 69% year-over-year to $138 million during the second quarter. Year-to-date medical margin increased 78% to $300 million. Medical margin increased on a PMPM basis driven by the ongoing maturation of our markets and member cohorts even while accounting for the dilution from our strong membership growth and negative prior year development. During the second quarter, medical margin PMPM increased 9% to $113 compared to $103 last year. Year-to-date, medical margin for our year two plus partners, which excludes the dilution from year one markets increased 60% on a dollar basis and by 42% on a PMPM basis to $166. Our medical margin for the quarter included $7 million of net headwind from prior year claims and revenue including $16 million from prior year claims offset by $9 million of prior year revenue. The prior year revenue we recognized in the second quarter relates to final risk adjustment settlements across several payers. Prior year claims were primarily driven by two payers including one payer that changed how they processed post-acute claims last year, which resulted in a true-up during the second quarter of 2023. We are taking specific actions to minimize the risk of prior year claims development in 2024, which I will discuss in a few moments. Platform support costs increased 29% to $47 million. On a year-to-date basis, platform support costs increased 35% to $95 million. Growth in our platform support cost continues to run well below our revenue growth. As a percentage of revenue platform support costs declined to 4.1% during the second quarter compared to 5.4% last year. Our adjusted EBITDA was $10.3 million in the quarter compared with negative $2.7 million last year. On a year-to-date basis adjusted EBITDA was $34.1 million compared to $5.4 million last year. As a reminder, our adjusted EBITDA includes geography entry costs primarily associated with new partners that will generate revenue in 2024. The increase to adjusted EBITDA reflects the gain in medical margin, platform support leverage and contributions from ACO REACH. Adjusted EBITDA contribution from ACO REACH, which is included in other income on our P&L was $11.2 million in the second quarter compared to $6.2 million last year. Year-to-date, ACO REACH has contributed $14.5 million to adjusted EBITDA, compared to $9.4 million last year. It's important to remember that the contribution from ACO REACH doesn't fully include allocation of corporate overhead and our MA business drove approximately 70% of the year-over-year gain in adjusted EBITDA during the quarter and about 90% of our adjusted EBITDA gain year-to-date. As Steve referenced, we are very encouraged with the performance of our ACO REACH business. Our underlying cost performance continues to meaningfully beat the national benchmarks and improve data sharing from CMS allows us to assess our performance in a much more predictable manner. If you look at the combined performance of MA and REACH which is how we operate the business, medical margin profitability is ahead of our internal expectations and roughly comparable on a PMPM basis. We are increasingly optimistic the strength and predictability of REACH will be sustainable on a go-forward basis which is reflected in our updated 2023 guidance. Before turning to our balance sheet, I wanted to discuss our reserving approach in MA and actions we are taking to minimize the possibility of negative development in 2024. A key driver in prior year development we have recognized this year has been associated with the breadth and complexity of our health plan relationships. As we mentioned in the last call, we currently work with 30 health plans across approximately 100 different contracts and this will continue to increase in future years. Our ability to work with these payers and meet them where they are is very strategic and allows us to unlock historically unmanaged markets as a first mover. To support our growing scale, we are making proactive investments and we recently hired a new SVP of Data Solutions. This role will enhance our data capabilities and improve how we utilize data to support our operations and financial reporting. Additionally, with the support of stronger REACH performance, we are strengthening our IBNR reserves on a go-forward basis which will significantly reduce the potential of negative claims development next year. We are very pleased that the strength and durability of our business model has enabled us to both improve our adjusted EBITDA outlook for 2023 and set a strong foundation for performance in future years. Turning to our balance sheet and cash flow. As of June 30, agilon had approximately $590 million of cash and marketable securities and total debt of $41 million. Cash flow from operations was negative $21 million for the quarter which was in line with our expectations. As a reminder, our cash flow generally lags adjusted EBITDA because of the timing of final settlements with payers which are typically nine to 12 months after the year-end. Agilon remains extremely well capitalized and we do not anticipate needing any external capital to drive our future growth. During the second quarter, agilon repurchased approximately 9.6 million shares for $200 million in conjunction with the secondary offering by our founding equity sponsor. We were pleased to complete the transaction which creates strong long-term alignment between our key stakeholders. Turning now to our updated outlook for full year 2023. We have raised our membership and revenue ranges as well as our adjusted EBITDA outlook to a range of $0 to $23 million. At the same time, we have moderated our medical margin outlook by approximately $30 million to a range of $500 million to $530 million. Our updated outlook reflects our decision to strengthen our MA reserves in 2023 while embedding a range of scenarios on utilization and cost trend. This was more than offset by stronger ACO REACH results and performance in our partner markets and we expect our updated approach to MA reserving will support our performance in future years. We now project ACO REACH will contribute $30 million to $35 million to our adjusted EBITDA in 2023, up from $5 million to $10 million previously. Full details on our third quarter and full year guidance can be found in the earnings press release.

Thanks, Tim. Before opening up the lines for Q&A, I want to emphasize three key points. First, the durability of our partnership model is driving predictable performance in terms of patient care reinvestment in our partners and earnings to agilon. Second, our year-to-date performance is in line or ahead for our partner markets in MA and ACO REACH which has enabled us to improve our outlook for adjusted EBITDA in 2023, while setting a strong foundation for 2024. And third, we remain very confident in the sustainable long-term trajectory of our business including our execution against the key drivers for 2024 and beyond. With that, we are now ready to take your questions. Operator, please start the Q&A session.

Thank you. The first question on the line comes from Lisa Gill of JPMorgan. Your line is open. Please go ahead.

I have a couple of clarifications to make sure I understand correctly. First, Tim, you mentioned strengthening the reserves. Considering your medical cost margin in the second half is expected to decrease based on the revised guidance, how much of that should I attribute to reserves versus your expectations for trends? I heard both you and Steve mention several times that trends are in line with your expectations, so I want to clarify that. Also, regarding the sustainability of the REACH results, you indicated that you expect a modest improvement in 2024 and 2025. Is that improvement based on this new baseline? Are you viewing the growth rate differently than the previous expectation for a modest improvement in those years?

Yeah. Lisa, this is Tim. That's a great question, thank you. Directly addressing your first question, what we've aimed to do for the second half of the year, particularly in light of our strong ACO and REACH performance, is to adjust our medical margin outlook by enhancing our reserves to account for a variety of potential outcomes. Instead of specifying percentages for different areas, we've assessed the range of outcomes that could occur in the second half. We want to ensure that we have sufficient reserves to reduce the likelihood of any prior period developments affecting next year, which includes being mindful of potential changes in utilization trends in the second half. I won't quantify or break it down into specifics, but we have focused on strengthening our reserves to accommodate these various outcomes.

And Lisa, on the ACO REACH front, we are seeing excellent results. This program aims to outperform the national benchmark for in-year cost trends, and we are currently over 300 basis points ahead of that benchmark, which was about 110 last time we spoke. This improvement stems from our ability to maintain steady utilization trends, even as the fee-for-service benchmark increased significantly in the last quarter. It highlights the unique advantages we have with our primary care physicians, enabling us to effectively manage our most complex patients. Regarding sustainability, we now have enhanced transparency around the information we receive, especially concerning the retro trend adjustment. While we always knew our trend, we lacked knowledge of the national benchmark. Now, Tim and the team receive updated information monthly, which boosts our confidence. The program mechanics establish that our baseline savings at the end of 2023 will carry forward. In 2024, if our performance aligns with the benchmark, we can expect similar results to 2023, but if we exceed the benchmark, those figures will improve. This noteworthy enhancement in baseline performance within REACH has justified our raised guidance for 2023 and enabled the reserving actions Tim discussed to prepare for any potential adverse outcomes, ensuring a robust run rate as we move into 2024.

That's very helpful. Thank you.

Thanks Lisa. Operator, can we go to the next one.

The next question comes from Ryan Daniels of William Blair. Please go ahead. Your line is open.

Yes. Hey, guys. This is Jack on for Ryan Daniels. Congrats on the quarter. I just kind of want to go back to something previously. And this is actually from one of the partnership announcements that you guys had, but for one of the partnerships that you mentioned in 2024 previously you noted that there was going to be 32 physician groups. And the most recent one it looked like there was 31 physician groups. I just want to make sure I'm reading that right. Is there anything to call out with the loss of that one group? Did a physician group just kind of get to…

Yes. I think there might be some confusion regarding physician groups and geographies. What we've announced is still 32 physician groups. We've never lost a partner group.

And it's the six groups that we've announced, it's the 100,000 incremental patients for next year. So that's very much in line. I think what we're seeing for the class of 2024 and for this pipeline in the class of 2025 is that, our differentiated performance on cost and quality is making us that much more attractive to groups who are thinking about making the move to value. One data point I'll just give you about the class of 2025 is I believe this is the first class in which we have signed up a partner medical group that previously was aligned with what we would consider to be a competitor. And what we heard from them was, they were not getting the performance via that relationship and so they decided to end it. And so I think all of this ties together back to this flywheel the better we perform, the better our partners do, the more other physicians want to join. So it's in line with what we've communicated before and the pipeline is getting stronger based on that dynamic.

I want to clarify that the six new partners will bring our total to 32 partners and at least 100,000 members from these new partners is a total membership projection. We expect to add about 145,000 members next year due to the same geographical growth, making it our largest new group when viewed collectively. Additionally, one reason we are increasingly optimistic about ACO REACH is that we plan to grow our ACO REACH membership next year for the first time. We will introduce several new ACO REACH markets, adding at least 25,000 new ACO REACH members. Therefore, next year represents a significant opportunity for membership growth.

All right. Thanks for the question. Operator, can we move on.

The next question on the line comes from Jailendra Singh of Truist Securities. Please go ahead.

Thank you and thank you for taking my questions. I want to go back to the medical margin guidance change topic. Just wanted to better understand like how are you going about updating these estimates on these new reserves. Just trying to get your comfort around the reserves if it's announced, is it all driven by your ACO REACH experience which gives you good visibility? And have you captured some other data points? And as we think about 2024 and any potential prolonged utilization uptick what levers do you have to go back to payer contracts to renegotiate anything there would be helpful.

Yeah. Well, let me start on the guide and Tim can comment on that. I mean, I think the objectives we are trying to achieve, is that we wanted to beat our 2023 adjusted EBITDA and we are highly confident about that. That is driven both from the REACH outperformance that we've talked about in which we are meaningfully beating that national benchmark and the differences in our model. But then, to Jailendra, our partner MA markets ex-PPD, are performing extremely well. And so, that is really a powerful part of what we're trying to do. As we talk about sort of the strengthening of reserves that Tim laid out there's kind of three things that I think we look at this year that we want to make sure we accounted for in any sort of adverse scenario. One is, the PPD. We want to eliminate the likelihood of that in 2024. And so that was our first objective. Second is, the supplemental benefits from payers is an area where we have seen higher costs than what we projected and what our payer partners had projected. We know from our conversations those are going to correct for 2024, but we want to make sure in the back half of 2023 before they go away or substantially reduced that were covered around that. And then, the one area that we see the type of elevated utilization that some of the health plans have talked about is in our one non-partner market of Hawaii, which is a broad fee-for-service network. And we are seeing higher utilization. So we wanted to make sure that we covered all of that from a guide perspective. And then, I think you asked just about 2024. What we try to communicate is our confidence on 2024 is even higher than the last time that we talked to you. One is this run rate performance that we laid out. Two is our clinical programs that are driving these results. We're in third of our existing MA markets. We're in two-thirds of our existing REACH markets. So we have a lot further to go. By the end of 2024, we'll have a full suite of clinical programs in every single one of our markets from the class of 2024 and earlier. That should provide a meaningful step up in terms of cost and quality management. The benefit changes, that's new information for us that we were not previously factoring. And then finally, this implementation on the class of 2024 is going extremely well. This is the first class that's able to leverage that Minerva platform that we talked about earlier as part of our acquisition. And so all of that, leads to us to be, feel very good about 2024 and then the forward application from that.

All right. Understood. Thanks very much.

The next question comes from Stephen Baxter of Wells Fargo Securities. Please go ahead.

Yeah. Hi. Thanks. I was hoping that, you could maybe be as specific as possible about what your level of claims visibility is for the second quarter. I guess, first, how closely is ACO REACH claims data track with your actual MA claims experience. I guess, how complete would you judge the ACO claims data to be, for April and May at this point? And just to make sure I understand the actual guidance change for medical margin, is your underlying estimate before making this reserve change changing in any way, or would you say the entire change in your medical margin guidance, ex the prior year item is related to your reserving change whether that's assuming a higher margin for adverse development or something of that nature? Thank you.

Our visibility is exceptionally strong, and we have a high level of confidence. This stems from our distinct model, where we interact with primary care providers daily, managing complex patients. Our goal is to identify these patients better and ensure that PCPs and care teams are engaged in our clinical programs. The data we collect focuses on high-cost settings, such as inpatient and emergency care, and allows us to achieve the results I mentioned, with inpatient metrics showing a stable to slightly decreasing trend in the mid-single-digit range. In response to your question, we are 90% complete on our May year-to-date reach claims, which gives us very clear visibility. There is some lag with Medicare Advantage claims; however, the same markets, doctors, and clinical programs offer a strong correlation between our clinical initiatives and claims data, providing us with a significant level of visibility. Furthermore, our model has proven to perform exceptionally well during periods of high utilization compared to broader fee-for-service markets, with our ACO REACH performance being 300 basis points ahead. In our partner markets, the medical margins are three times greater compared to our Hawaii market, underscoring the effectiveness of our model. One notable data point is the success of our clinical programs, particularly for high-risk patients and their follow-up visits within two days post-discharge. We have seen a 28% increase in these follow-up visits compared to last year, significantly lowering readmission rates and contributing to the stable to decreasing inpatient trend. We have great confidence in these results, and the REACH comparison set provides us with excellent visibility on claims that align with our operational indicators.

Yes, that's correct, Steve. Regarding ACO REACH and its connection to how we are managing MA, it's important to note that CMS has consistently been our best payer in terms of the currency and accuracy of the claims data they've provided. From the start of the program, we have maintained a strong position in estimating our incurred but not reported (IBNR) claims for the DC now ACO REACH business. The challenge with ACO REACH has typically revolved around the revenue aspect, but CMS has greatly assisted us in gaining better insights over the past six to nine months, which has improved our perspective. These factors give us substantial confidence in our ACO REACH projections moving forward. In contrast, the MA side presents a much more complicated situation with multiple payers, which we've mentioned a few times already. This complexity complicates our IBNR estimation, leading to some blind spots that have resulted in prior period developments we've discussed this year, both positively on the revenue side and negatively on the claims side. We aim to eliminate these issues. We have implemented actions, including hiring a new Senior Vice President of Data Solutions, who has extensive experience in this area. This individual will help us collaborate with payers to address those blind spots and improve our data handling for better reserve estimation. In terms of strengthening our reserves mentioned in our guidance, we believe our reserves should be robust enough to account for these potential blind spots and any changes in utilization expectations in the latter half of the year. We are confident that the reserves we've established for Q2 and the remainder of the year are sufficient to cover various outcomes, ensuring we do not face prior period developments and are prepared for any potential increase in utilization.

All right, Steve thanks very much. We appreciate it. Operator, can we move to the next one?

The next question comes from Gary Taylor of Cowen. Please go ahead. Your line is open.

Hi. Good evening. I want to discuss ACO REACH for a moment since it seems important to all of us. I have two questions. First, in the last quarter, the ACO MLR decreased by about 600 basis points year-over-year. Was there any reserve release from ACO REACH during that quarter? Secondly, I'm trying to understand the changes since the IPO. Initially, we anticipated about $60 million in EBITDA with $25 million coming from ACO. However, during the March Investor Day, those estimates were halved, and now just a few months later, it seems we're aiming for the higher end of that range in 2023. What has changed in the past few months that led to this swift adjustment in outlook?

Yes. Regarding the first part of your question about the improvement in our Medical Loss Ratio, particularly in the second quarter and year-to-date, when we began the year, we approached ACO REACH with caution regarding the revenue components. This was reflected in our discussion during Investor Day. Our focus was not on claims release or the incurred but not reported aspect; we have maintained strict control over that for the last two and a half years of the program. Our caution was mainly about the retro trend adjustment and understanding the real trend. We took a conservative stance on this in the first quarter. As we progress through the year, we are obtaining more data, and the retro spend adjustment is showing more favorable results. We have incorporated this into our year-to-date results and our projections moving forward. Our growing confidence in the anticipated revenue numbers and our visibility into significantly exceeding the fee-for-service benchmark are contributing to the increase, leading us to adjust the annual projection to $30 million to $35 million. Essentially, we are easing some of the high level of conservatism we had at the beginning of the year as we see how the model is functioning.

And Gary, what I would just reiterate is, the big change is not so much in our visibility to our trend. It's in this monthly update on the national trend. And so, as you've been on the calls people have talked about fee-for-service utilization trending up. That's what's happened, in this national reference population. And that's where we're seeing the gap, between what we're managing to and what's happening with that growing, and that's the way the program really rewards you. So I think going back to sort of the unique levers in our business, and the fact that the clinical programs we shared in March being ahead of where we expected them to be, we are really effectively managing that inpatient, that ER and the gap relative to the benchmark is growing which is driving the strong result.

All right, Gary. Thanks very much. Operator, why don't we move to the next question, please.

Of course, the next question comes from Whit Mayo of Leerink Partners. Please go ahead. Your line is open.

Hi. Thanks. As you guys look at 2024, you've mentioned a lot of optimism around your ability to grow. Are there any operational or clinical changes, you're thinking about for next year either how you're approaching coding, engaging with the panel, changing the panel, the physician workflow, just anything as you kind of look out over the next three years with the risk adjustment changes. And I hear you a lot on the clinical programs having a positive impact, but just maybe operationally, how you're modifying things for next year? Thanks.

Thank you, Whit. Operationally, we focus on the burden of illness to assess patient acuity within our clinical programs. This approach enhances our quality initiatives and helps us better identify complex patients. Our acquisition of the Minerva platform, which we discussed in March, enables us to share patient data with our partners sooner, facilitating their enrollment in our programs. This has significant implications for both costs and quality. In terms of implementing the new risk model, everything is progressing smoothly, and our metrics are performing well. Our centralized physician medical record reviews are examining more charts, providing a stronger peer review for physicians during patient assessments. Overall, the shift in the risk model and the payer conversations regarding benefit changes, which we hadn't anticipated, are manageable. Additionally, being proactive with our clinical programs and identifying more patients with the strategies I mentioned should yield positive results. Looking ahead to 2024, we are optimistic about expanding our programs and improving patient identification.

Whit, thanks, very much. Operator, why don't we move to the next question, please.

We have a question from Adam Ron of Bank of America. Please go ahead.

Hi. Thanks for taking the question. I think at one point, you mentioned that you think because of the new implementation cycle that you're being on the 2024 cohort, you think that they would have a higher starting point, for medical markets and I think at the Investor Day, the number you pointed to for 2023 was $46. So would it be upside to that specifically? And like any help presenting like the quantification of how significant it could be.

Yes, Adam, that's a great question. Thanks. So, you're exactly, correct. Typically, during the year our new class comes in somewhere between $30 and $60 MA medical margin PMPM. This year is probably right, around the middle of that. By the way the middle of that range, is about where we breakeven in the first year from an adjusted EBITDA standpoint. Next year, we actually expect that the new class will come in at average, actually above the $60 range. So, that's really positive for us particularly, in the year, with the advanced notice coming in where it is. We've got a really big class, a really strong class, and that they're going to come in probably in the first year above that $60 range, which means they are going to be generating positive EBITDA as a new class in the first year in 2024.

Adam, thanks for the question.

…sustainable go forward?

Each year will vary based on the mix. We are progressing well with the class of 2025 and should have a clearer picture in the coming months. Key factors include how quickly we can onboard new partners and the duration of the implementation cycle. We are in a strong position with the class of 2024, as some larger partners will have been in the implementation process for over a year. The outlook for the class of 2025 is also positive. While I am not ready to commit to specific numbers, I believe we will benefit from the lengthy implementation cycle. Additionally, our recent investment in mphrX will help us integrate more swiftly with EMRs and new partners, which is essential for accessing the data needed to enhance our performance in the first year. By securing early partnerships and extending our implementation cycles, we expect to achieve improved medical margin performance per member per month, although I cannot provide guidance for 2025 or 2026 at this time.

All right. Thanks Adam. Operator why don't we move on to the next question please.

Of course. The next question comes from George Hill of Deutsche Bank. Please go ahead, your line is open.

Hey good morning guys and I appreciate you taking the question. Steve you kind of touched on this a couple times about orders. If I could get you to dive in a little more detail where you're expecting a lot of your payer partners to rationalize supplemental benefits in 2024 as a result of reimbursement changes and plan changes. I imagine that's going to lower your cost to serve your beneficiaries. I guess can you talk about the moving pieces there kind of where you expect it to I guess most frequently impact costs on your side?

Yes, George. We have a strong relationship with over 30 payers, including five national ones, and our joint operating committee discussions have been particularly productive. The value we provide to these payers is especially significant as fee-for-service utilization increases. They are looking to transition more patients into models like the agilon partnership while facing challenges from risk model changes. Our ability to deliver 4-plus star quality in all our year two plus markets, along with our improved patient identification and enrollment efforts, is crucial for them. This presents a real opportunity for us. Specifically, each payer is adjusting different benefits, and we have good visibility on how these benefits are performing. Notably, reduced cash cards related to dental or over-the-counter expenses are likely to disappear or be significantly cut back next year. Overall, we expect the MACVAT to decline in various areas, sometimes quite substantially. I hope this provides some context about our current situation. We're optimistic about it, and while we anticipated some changes for 2024, we chose to maintain our expectations until we had better visibility, which has been a positive development.

All right George. Thanks very much appreciate it. Operator, why don't you move to the next one please.

The next question comes from Justin Lake of Wolfe Research. Please go ahead, your line is open.

Hey guys. This is Austin on for Justin. Just to follow-up on George's question there. Just thinking through the magnitude of the impact of 2024 do you feel like the reception from the payers on the supplemental benefits is enough to offset like almost totally any risk model impact, or how should we be thinking of that stepping into next year? Thanks.

Yes. I mean I'm not sure I would characterize it that way. I think we've sort of said hey it's very manageable for us in that kind of before any sort of supplemental changes in that kind of 2% to 3% range. I think that there is some relief coming from that. And I think as we've done implementation maybe that there's some modification around that. But it kind of varies by payer and it kind of it varies based on their market strategy and sort of the relative changes they're looking at. But I guess my point is on the composites there will be some relief.

All right Austin. Thanks very much. Operator, why don't we move to the next one please.

The next question comes from Sandy Draper of Guggenheim Securities. Please go ahead.

Thank you for taking my question. Tim, I believe I understand how the increased reserves are affecting the MLR for the second half of the year. However, I'm curious about the cash flow. I noticed an increase in other working capital items. Did this have any impact in the second quarter in terms of reconciliation? Essentially, I'm trying to understand if having these higher, more conservative reserves will reduce your conversion rate of EBITDA to free cash flow, or if there will be a one-time adjustment followed by normalization. Thank you.

Yes, I think it would be more effective to answer the second part of your question first. The math works as you described; it's more of a one-time catch-up and then it will normalize moving forward. You need to be cautious when looking at the overall working capital metrics. When examining receivables and payables on our balance sheet, we don't pay the claims in full, nor do we actually receive all the cash from the revenue immediately. Ultimately, we settle the accounts. We receive some payments along the way and then settle the balance, typically between nine to twelve months later, for the full difference between the capitated revenue and the claims. Therefore, as you review our balance sheet and analyze the virtual balance sheet, such as days claims payable or days sales outstanding, those numbers will fluctuate based on the timing of the information we receive from the payers regarding which claims have been paid, rather than having a direct impact on our cash flow. That said, if our medical margin is expected to be lower in the second half due to reducing our reserves, this will have a one-time impact on EBITDA and cash flow, which will ultimately stabilize thereafter. I hope that clarifies things.

All right, Sandy. Thanks very much. We appreciate it. Operator, why don't we move to the next one please?

The next question on the line comes from Jamie Perse of Goldman Sachs. Please go ahead.

Hey. Thank you. Good afternoon. So I think by year end the average time on the platform is going to be around 3.25 years or so. I guess just what is the typical progression for cohort at that level of maturity in terms of expense PMPM? I'm just trying to understand what the existing cohorts might look like from again the expense side in a typical progression from call it year three to four and then we can obviously layer on the new markets on top of that? Thank you.

Yes, would you like to start?

So I was going to say I mean we typically talk about it Jamie from a med margin PMPM because you have very different benchmarks and cost base lines depending upon the markets in which you operate. And so I mean you could have a difference between a baseline of $725 of cost to $850 cost. And so it's really to give you a number on the cost side it's really the relationship between the revenue PMPM and the medical cost PMPM. And on year three specifically.

Yes, I was going to say that each market will vary in terms of its member mix, particularly regarding risk adjustment and claims. Ideally, these factors align, as that is the essence of risk adjustment. We believe medical margin is a more accurate figure, though I can't specify an exact number for each market since they differ. The information we shared during Investor Day illustrates the progression of our market cohorts over time, serving as a solid indicator of where we anticipate they will land in terms of medical margin. You can observe the status of each cohort at the three-year mark, and while there may be slight variations from one market to another, they generally follow a similar trajectory.

And Jamie, I guess, I'll just close by saying I think we've demonstrated our ability to go to a diverse set of markets with a diverse set of physician group types and drive consistent performance across time. So I think what Tim talked about in terms of referencing back to that is a very good comparison set in terms of what that progression looks like which will be a combination of how that revenue and costs are reflected.

All right. Thanks Jamie. We appreciate it. Operator, why don't we move to the next one please.

The next question comes from Elizabeth Anderson of Evercore ISI. Please go ahead. Your line is open.

Hi, everyone. Thank you for the question. I noticed you mentioned your first competitive win. Does that type of business offer a better initial Medical Loss Ratio since they have shown some improvement, but it wasn't enough for them to continue with their previous arrangement? Additionally, now that you've hired the Senior Vice President of Data Solutions, what will be the primary focus of this new role? Will it involve integrating claims data, or are there other initiatives in progress regarding the services and programs you're offering to doctors and patients? Thank you.

Yes. Thanks for the question. I'll take the first one Tim can take the second. I think that the reason that they made the change at least what they're talking to us about is they have not been able to sort of drive the performance that they were looking at previously. And so how that translates over in terms of do they start in a better place than others I'm not sure I would necessarily say that. I think the factors that are driving better year one performance are the things that we've talked about which is a longer implementation period that they'll get. This Minerva platform that's going to get data earlier and the ability to identify those most complex patients and get them enrolled in clinical programs which we should have in place as they go live. I think those things enable a better stepping-off point versus maybe what they were doing previously. And then on the new position, Tim?

Yes, I think the idea was to bring in a very talented and experienced executive and build a group underneath them that are really looking at the whole pipeline of data for us beginning with what data are we getting from each payer, what's the quality of data, what's the timeliness of the data and how can we continue to work to improve that. How is that data ingested and conditioned? And then, how is that ultimately used both from an operational standpoint to drive performance as well as from a financial standpoint to drive our accruals in our financial reporting. So it's a pretty holistic approach. I think it's a really important step for us to take given the size and breadth of the data and the number of payers that we're talking about. And so I think it will help us across all of those fronts. It should certainly help us in improving our ability to continue to sort of improve the quality of our reserves to make sure that we're not minimizing the probability of prior period development next year. But on a much bigger scale, it's also going to help us tremendously with how we use data to drive operational outcome.

All right. Thanks Elizabeth. Operator, I think we've got one last question.

The final question comes from David Larsen of BTIG. Please go ahead. Your line is open.

Hi. Thanks very much for squeezing me in and congrats on a good quarter. Can you provide an update on your expectations for fiscal 2026 EBITDA based on sort of the new methodology? I mean can we sort of estimate 150,000 new MA lives at $500 each, that's about $75 million of market entry cost, which means you should be at about, let's call it, at least $500 million of EBITDA for fiscal 2026. Thank you.

We haven't updated our guidance specifically for the new methodology. However, we anticipate that the geography entry costs will remain around $500 per member for the next year. This means that the geography entry cost in 2026 will be approximately $500 for those members we are adding in 2027, and similarly, it will be about $500 per member for those we add in 2026. It's important to note that these geography entry costs are typically one year behind the member growth they influence. Despite this change, we are still confident in the underlying EBITDA performance we projected earlier. When we provide the next update for our long-term plan, we will address this as well. The calculations and reasoning you used are indeed correct.

And Dave, you can obviously get some sense for our geography entry costs for this year? David, do you have a quick follow-up?

No, just thanks. Congrats on a good quarter. Thank you.

Thank you, Dave.

All right. Thank you everyone. We really appreciate your interest and your questions. And I think you can hear that we're excited about the progress we've made to-date and the future ahead. So look forward to updating you on future calls. Thanks everybody.

This concludes today's conference call. Thank you all for joining. You may now disconnect your lines.